LONDON (Reuters) - Banks in Britain will move operations to the European Union at a faster pace if there is no Brexit transition deal by the end of March, the Bank of England (BoE) said on Tuesday.
Britain and the EU are beginning talks on a transition period of about two years to start when the UK leaves the bloc in March 2019.
But many banks, insurers and asset managers have already begun to announce plans for new EU hubs to be sure of being able to serve customers in the bloc after Brexit.
The end of the first quarter is a “significant moment” as it will be just a year before Brexit, BoE Deputy Governor Sam Woods told parliament’s Treasury Select Committee.
“If transition is not agreed, then firms will start to progress things at a higher pace,” said Woods, who also heads the BoE banking supervision arm.
Even if there is a political deal on transition by then, firms will have to decide on the extent they can rely on it, Woods added.
The BoE said in December it would spare European bank branches in London costly capital rules after Brexit as long as their supervisors in the European Union cooperated with the UK.
Woods said he would visit counterparts in Paris, Frankfurt and Dublin in coming weeks to discuss the possibility of memoranda of understanding with them to deliver the BoE’s “vision”.
“Those discussions are very active,” Woods said.
But he expects a “point of tension” to arise over how to treat cross-border wholesale banks, as Britain views them as global players, while the rest of the bloc sees them through a more local mindset that favours tighter controls.
Woods said if there was no cooperation among supervisors, the BoE would have to “pull the ripcord” and allow “interim” permissions for the 25 biggest European branches to become subsidiaries, which involves building up a local buffer of costly capital.
The EU’s Brexit negotiator Michel Barnier has said UK financial services won’t keep “passporting” rights to offer services across the bloc as Britain is leaving the single market.
Financial firms could rely to some extent on equivalence, whereby the EU grants market access if Britain copies the bloc’s rules, Barnier has said.
Woods said it was technically feasible to devise a system between staying in the single market and the “rule taking” system of equivalence.
“It’s perfectly possible to have something in the middle,” Woods said.
This would only be needed for a narrow subset of the UK financial market such as investment banks and asset managers that operate cross-border, he said.
Financial lobbyists have suggested the BoE could have a new competitiveness remit to help the UK financial sector stay ahead after Brexit.
“I am personally very cautious about that,” Woods said.
A competitiveness objective would raise the risk of dilution of focus and the risk of weaker regulation, he added.
Reporting by Huw Jones; Editing by Mark Potter